Last week the Bank of Uganda announced it had lowered its
regulatory Central Bank Rate (CBR) to ten percent from the previous 11 percent.
Bank lending rates have followed the CBR since it was launched
in 2011, as the figure has real implications on at rate banks can borrow from
the central bank. Banking lending rates then are a few percentage points above
the CBR.
Since the beginning of the year lending rates have followed
the CBR down with base lending rates threatening to be break below 20 percent
for the first time in six years.
This should be welcome news all around as lower rates would
mean more borrowing and therefore more cash sloshing around.
"The banks are unlikely to run out and send the credit taps gushing seeing as there are just coming out of a period when bad loans are at their highest levels in almost a decade. Fear is still ruling the credit market. Once beaten twice shy...
Relatedly the Treasury bill and bond yields remain determinedly
in double digit territory.
In the budget the government pledged to half its borrowing
from the public, which would put downward pressure on the government paper
yields, but we heard that last year, so we really can’t take that promise to
the bank.
Borrowers are coming back steadily into the market.
According to the Bank of Uganda growth in personal
loans came in at 20 percent in October
last year – the latest available figures, agricultural loans also grew by 13.7
percent but lending to real estate and the manufacturing contracted by 4.9
percent and about 15 percent respectively.
The figures suggest that consumption is rising but
production is not keeping pace. It’s a chicken and egg situation kind of. Which
comes first an improvement in general purchasing power or increased production?
But there can’t be increased demand without a jump in production to create the
jobs that will drive the demand.
Of course the lending rates are such that it would take
serious discipline to contract a loan and show a return in the current economic
environment. For medium to long term optimism we need to see growth in credit
to the productive sectors in order to hope for a sustained turn around in our
current economic situation.
The growth or lack of growth in credit serves as a useful
proxy for a sector’s health.
Since there is no visible growth in lending to manufacturing
we can assume they are struggling to expand capacity, if at all. Anecdotal
evidence suggests there has been no real growth in this sector over the last few
years, judging by how many are shutting down or workers laid off.
"But is lack of credit the problem or a symptom of a larger problem?..
As a business one has the option to finance their business
via an injection of resources by the shareholders, retained earnings held over
from previous profitable years or borrowing from individuals or institutions.
When starting a business it maybe enough to rely on ones on
resources as well as that of family and friends. You often don’t need much
sophistication to get money at this phase. But as the business gets more
sophisticated sourcing money becomes correspondingly complex be it borrowing
from the banks, the public or raising funds on the stock exchange.
The more orderly you are as a business not only do you have
more options for raising money but you can get it cheaper than a less organised
company.
Unfortunately for our many of our businessmen our businesses
have remained subsistence businesses, intended to support the founders
lifestyle and not much else. How much can one man eat or drink? How many beds
can he sleep in at the same time?
With such limited objectives there is no need for the
business to become more sophisticated, to be better able to weather the
economic storms that inevitably come around every so often.
As an example during the bailout outcry last year, it was
reported that one business man had taken out an overdraft to build a factory.
The mismatch of assets and liabilities seem obvious at a glance, but when you
have come from a time feast, when cashflows were good you think you would be
able to beat the system. Arguably if you were more organised not only wouldn’t
you gamble like that but you would also have many options to raise financing
that you wouldn’t box yourself into a corner.
The proof of this is that there are companies that while
they have been distressed during this down turn continue to operate and
collapse is not eminent. And we are not only talking about international
companies.
"The reduction in the CBR is welcome news for all of us but if we have structural issues in the economy or in our businesses or personal finances it will not necessary lead to an improvement in our lot...
